How to handle processing a short sale with a second mortgage or HELOC (home equity line of credit).
Often, sellers will have a second mortgage or home equity line of credit in addition to a first lien position mortgage. You will have to clear all liens off title to transfer the property and close the short sale so you will need to deal with both.
The first lien holder always gets paid first, so if a sale is enough to satisfy the first, but not the second mortgage, the first will get paid in full, and a short sale will address any shortage to the second. If the value of the home is less than the balance on the first lien position mortgage, you will need to short both the first and the second mortgages.
Here's how it's done!
Get your numbers together!
Get current payoff statements from both lien-holders. Then estimate the selling price of the home less closing costs ( commissions, transfer taxes, legal, pro-rations, etc).
If the proceeds from the sale (after costs) are enough to cover the payoff amount on the first mortgage and there is something left for the second note holder, you will only have to short the junior lien, as the first will be paid in full. You will not deal with the first at all.
If the proceeds from the sale (after costs) are NOT enough to cover the payoff amount on the first mortgage you will need to short both mortgages.
Dealing with a second mortgage only short sale.
If only the second mortgage will take a hit, you will go through the regular short sale process, exactly like any other but just with that one second loan. The first mortgage will receive full payment so they do not need to be involved at all.
Dealing with Two lienholders at once.
This is usually where the confusion sets in. If you are shorting the first, you will go through two short sale processes at once, individually with both lenders. It will be your responsibility to move both, as the two lenders will not communicate with each other.
Keep in mind the first sets the rules here and will have some set amount of proceeds they will allow to go to the junior lienholder as settlement for the debt. This amount varies by investor but is usually between $1,500 and $6,000, regardless of the amount owed to the second.
Most seconds generally accept these investor guideline mandated amounts. Not always, but most of the time.
Simply draft your estimated HUD showing the payoff to the junior lienholder in the expected amount, and submit it with both short sale packages.
Dealing with Two lienholders Who Don't agree on settlement amounts.
Now you'll have to get creative!
Example: John has a first mortgage with Wells Fargo for $200,000, and a second mortgage for $50,000 with Navy Federal. The house sells for $175,000. Wells Fargo says they will allow $3,000 to go Navy Federal, however Navy Federal won't release their junior mortgage for less than $5,000. As you can see this presents a shortage of $2,000 that must come from somewhere.
In this situation you have a few choices:
- Attempt to renegotiate the payoff with either lienholder.
- Get the money from another source. Other contract parties are usually the easiest solution.
The key is anticipating this in advance as much as you can to avoid major push back from the buyer if the request comes last minute.
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